Trading of futures in the stock exchange is a very exciting venture with the potency of large gains accruable. Much like any form of investment strategy, there are associated advantages and drawbacks.
We will, therefore, examine the various pros and cons of trading in futures below and point out some considerations that would compel one to trade in futures online.
What are the futures of the stock exchange?
A Futures in stock market is an agreement that allows one to buy or sell an underlying instrument notified in the contract at a future date. The predetermined price at which the buying or selling of the underlying security takes place as per the contract is called the contract price.
These contracts can be on various underlying instruments, such as commodities, stock indices, and individual stocks. In the financial stock market, this instrument gives an avenue to investors for taking a view in terms of price movements of securities or indices.
Advantages of Trading Futures in the Stock Market
Leverage
One of the most attractive features of trading in futures is the leverage they provide. With a relatively small capital, a trader can control a large position. If the market goes in the direction that this trader has forecasted, then these leverages may bring huge profits.
Liquidity
Due to liquidity in futures markets, a buyer or seller counter-party will always be available. Therefore, it will be quick execution with aggressive prices and hence no manipulation of prices.
Hedging
The most common reason people trade in futures contracts is to hedge against undesired charges in the price of securities that one already holds. For example, a person can sell stock index futures to protect against loss if he has a portfolio in stocks.
Transparency
The markets for futures are characterized by transparency and heavy regulation. All trading activities in such markets are monitored very efficiently by the relevant regulatory bodies for fair practices and to assemble fraud cases. Data on prices and volumes are available to traders, which is always very useful.
Disadvantages of Trading Futures in the Stock Market
High Risk
The very leverage that makes futures attractive can also be a double-edged sword. Where it can amplify gains, it can also very easily magnify losses. It means that traders can lose more than their initial investment, and, therefore, the trading of futures is classified as a high-risk activity.
Complexity
Trading in futures is complex, highly risky, and may not be suitable for all investors. There should be a considerable amount of knowledge and experience about how future contracts work, together with price factors and strategies to manage the risk involved.
Margin Calls
When one trades futures, he has to keep a margin account with the broker. If the market goes against their position, they may receive a margin call that demands them to inject more money to maintain the position. Otherwise, if one cannot meet the margin call, his or her position may be forcefully liquidated at a loss.
Market Volatility
The futures markets are very volatile, and prices fluctuate drastically during a very short period. That may imply that the value of a futures contract could swiftly change, thereby increasing possible losses.
Online Trading Key Considerations
Choosing the Right Platform
While online trading futures online, one has to choose the appropriate trading platform. The trading platform should be offering competitive pricing; it must be highly secure and provide relevant educational resources to its users.
Risk Management
The most important aspect of futures trading is how to make sure of risk management. Always use stop-loss orders that will help in limiting the possible losses; then, use the logic of diversity in trading strategies for reducing linearly associated risks. It’s also important to keep a tab on the positions and adjust the strategy with changing market conditions.
Conclusion
Trading futures stock markets involves immense potential along with killing risks. Added to the leverage, liquidity, hedging capabilities, and transparency, the futures markets are an exciting proposition in the view of many traders.
Whether it be a seasoned trader or a newbie in the world of online trading, knowing the pros and cons of futures trading is the key to sound investment decisions.